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From Karachi to Clinton, New York…and Back

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October 2003

This past summer we had the distinct honor of creating an investment research internship for Farrah Lakhani, a native of Karachi, Pakistan and a sophomore at nearby Hamilton College in Clinton, New York. Farrah moved from Pakistan to Hamilton College in August 2001. Her assignment was to research the Asian operations of four of our Quality Core holdings (Coca Cola, Colgate-Palmolive, General Electric and Rio Tinto plc) and report on their activity in China, India and Asia, in general.

As evidenced by previous newsletters, and the many changes we have made to our Buy List to reflect Asian opportunities, our investment outlook is selectively bullish. We remind our readers that Colgate-Palmolive and General Electric have been holdings at Strategic for over ten years, while positions in Coca Cola and Rio Tinto were acquired in the last two years.

The attached report summarizes Farrah’s work. We have edited it only minimally, to afford you the opportunity to hear Farrah’s ”voice.” I admit to some trepidation when pondering how well I would have done as a sophomore in college if tasked with writing such a paper in Pakistan’s language of Urdu.

Farrah has been a pleasure to learn from and we are most grateful for her work. We also wish her luck as she pursues an investment banking or research position in New York City following her graduation. Best of all, however, is the fact that Farrah returned to visit her hometown at the conclusion of her internship for the first time in two years. Given the activity that has taken place in that part of the world, her personal comments at the end of her memo may provide some comfort to our readers…it did to us.

Introduction
Any college student will tell you the trials and tribulations of leaving one’s home to live at an academic institution. But what you will rarely hear about is the extensive and time-consuming adjustment process involved in leaving one’s country for further academic pursuits. Having been given the opportunity to be part of a prestigious institution, like Hamilton College, I must say the return on my investment of time was well worth the opportunity.

Certainly, it was an even more profitable venture on my part to be given the chance to conduct research pertaining to my native part of the world. The facts and figures that came to light about major countries in the Asian region were not only interesting but also sometimes surprising. I conducted research on four companies from the Buy List and analyzed their performance in Asia. The following is a brief description of my findings:

Coca Cola: Emerging markets make up roughly 11% of the company’s unit case volume. In these markets, Coke’s focus is on availability of affordable products for consumers and the building of brand preference. The Company has invested $1.1 billion in China during the past year alone. Over the past nine years, over $8.0 billion has been invested in India, 90% of which is invested in the bottling subsidiary. The company employs 15,000 people in China and over 7,000 workers in India. In its most recently completed quarter, Coke saw its unit volume climb 24% in China, a truly spectacular growth figure. However, evidence of risk is shown in India where growth slowed to a halt recently due to confusion over their water policy in that country. Despite risks and heavy investment, the growth prospects in this part of the world are stellar.

Colgate-Palmolive: The Colgate-Palmolive Asia division delivered a solid 4.5% unit volume growth in 2002. Sales and operating profit grew 4% and 19%, respectively. One of the main countries where Colgate has registered high returns is India. Key achievements in India for the year 2001-02 include a rise in market share by over 2.5%. In the “Best Employers in India 2002” study conducted by Hewitt Associates, Colgate was rated one of the top ten “Best Employers.”

Although India is the largest arm of Colgate-Palmolive’s International Operations, the company is now looking towards expanding in China extensively. It has been the largest toothpaste supplier in China since 1999 and now wants to make China one of its biggest markets in Asia and outside the United States. The company, which began distributing in China in late 1992, expects total investment in the world’s most populous country to reach $150 million by the end of 2004.

General Electric: GE China has opened 25 branch offices and established over 30 joint ventures or wholly-owned enterprises in China with total investments over $1 .5 billion.Similar success is enjoyed in India where the majority of GE’s businesses worldwide have a presence either through a joint venture, a wholly owned subsidiary, a strategic alliance or a business development and customer support presence. In Singapore, GE has nine manufacturing companies with an employment of 15,000, making it the second largest employer in the country. It is hard to imagine a scenario where GE will not prosper as Asia continues to grow.

Rio Tinto plc: This company is a world leader in finding, mining and processing the earth’s mineral resources. Market conditions in the United States, Europe and Japan were all relatively weak in 2002, but the same was not true of China. China’s growth, with its heavy focus on infrastructure development, has become a major influence in the market for many of their products. China now accounts for 17% of global copper consumption, 16% of aluminum consumption and nearly 23% of global steel consumption. In recent years, China’s consumption of metals has been rising over 10% annually and, for the time being, rapid growth seems likely to continue. This is leading to a major redistribution of global demand over a relatively short period of time. Since a significant portion of Rio Tinto’s productive assets are close to the Pacific Basin, the company is particularly well placed to benefit.

Conclusion and Personal Observation
Numbers don’ t lie … and they certainly show the great potential and investment opportunity that Asia has to offer. An economist would certainly jump at any Asian investment opportunity; a sociologist, however, might refrain. A lot has been said about the effects of a foreign company entering a market, which is culturally very different. The dealings of a foreign business are not only limited to the confines of the office building. It spans to influence the culture and the ethics of the whole society Multinationals like Coca Cola and GE have adopted a policy of social involvement in the various countries to ease the social pressures. In India, Coca Cola works with state and district governments to provide primary health centers, immunizations and hygiene centers. It is also involved in the Poverty Alleviation Program in Vietnam by providing women with their own micro business. In India, Colgate-Palmolive was avidly involved in providing relief to flood victims in the 2001 Gujarat earthquake.

The positive effects of increased foreign investment are clearly seen in all Asian countries. From a personal perspective, I was certainly surprised at the positive development that had taken place in my own city. Known as the “City of Lights,” Karachi is the metropolis of Pakistan. In the last two years, things had certainly taken a turn for the better, especially in the field of technology development. As a result, the “City of Lights” is fast becoming a small village. The establishment of new telecom companies has enabled a reliable network to be established to such an extent that now even a faqir (beggar) on the street has a cell phone. Better technology has also fueled a healthy improvement in the media sector. The introduction of new channels broadcasting liberal views has slowly sent a wave of open mindedness in the social nerve of the country. Though optimism is running high, there is a long way to go before a substantial face-lift is given to the country. Certainly, the signs of change are apparent, even to a college student.

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